Southwest Effect

The Southwest Effect is the increase in airline travel originating from a community after service to and from that community is inaugurated by Southwest Airlines or another airline that improves service or lowers cost.

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The term was coined in 1993 by the U.S. Department of Transportation to describe the considerable boost in air travel that invariably resulted from Southwest's entry into new markets,[1] or by another airline's similar activity.

The Southwest Effect was said to have three elements:

The new-entrant airline increased supply and offered lower prices. Southwest offered dramatically lower air fares than established airlines that usually enjoyed a near-monopoly in the communities.

Incumbent airlines lowered their own fares. Established airlines competing with Southwest Airlines sought to avoid Southwest entering their markets, and feared losing passengers and having to offer lower prices. Upon Southwest's entry, incumbent carriers lowered their own fares in that market (and reduced their profitability) to remain competitive.

Sales rise for all airlines in the market. For the communities affected, Southwest's entry and the corresponding drop in air fares stimulated business and increased demand for air transportation. This in turn increased the revenues of all airlines offering transportation to the community, and sometimes resulted in a net profit increase.

In recent years, new airlines have had a greater "Southwest Effect" than Southwest itself. A study released in August 2013 found newer, smaller airlines were having a greater impact on lowering the average price of a ticket where they fly. According to an MIT analysis of ticket statistics, between 2007 and 2012, Southwest's ability to lower fares had weakened from $36 per one-way fare to only $17 per one-way fare. At the same time, JetBlue, Allegiant, and Spirit Airlines were associated with dips of $32, $29, and $22, respectively, in markets that they entered.[2]

USA Today, in noting the trend to where the competitive effect on prices continued to be seen, but that JetBlue's impact on prices was now largest, suggested, "You might want to start calling it the JetBlue effect."[3]

^Wittman, Michael D.; Swelbar, William S. (August 2013). "Evolving Trends of U.S. Domestic Airfares: The Impacts of Competition, Consolidation, and Low-Cost Carriers" (PDF). MIT Small Community Air Service White Paper No. 3. MIT International Center for Air Transportation. p. 34. Retrieved 9 April 2014. The effects of other low-cost and ultra-low-cost carriers on average airfares at U.S. airports now exceed the Southwest effect. In 2012, the presence of JetBlue Airways, another low-cost carrier, was associated with a decrease of about $32 in average one-way fare, controlling for average itinerary distance and other low-cost carrier competition. In the same year, Allegiant Air service was associated with an average one-way fare decrease of about $29, and Spirit Airlines service was associated with a decrease of about $22. However, it is important to note that these latter carriers often charge ancillary fees in addition to the base airfare, so a comparison of changes in base airfares alone does not fully capture differences in total travel price.

^Jones, Charisse (16 August 2013). "Southwest's influence on lowering airfares waning". USA Today. Retrieved 9 April 2014. You might want to start calling it the "JetBlue effect."...Southwest's fabled ability to lower fares by its mere presence in a market has diminished..JetBlue, meanwhile, and ultra-low-cost carriers such as Allegiant and Spirit have shown a greater impact on lowering the average price of a ticket where they fly.